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January 09, 2009

The plunge in commodity prices

Gas prices are headed to perhaps $1 a gallon. This is incredible after they reached $4 a gallon within the last year. What's going on? Is this gyration in prices only happening to gas? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"No, it's not. Gas, I think, is just the most notable. This is happening, really, to many commodity prices. Commodities are fundamental, basic inputs into our economy, inputs that aren't processed much; think of it as almost taking it out of the ground or growing it, and then it goes to market. And so what we typically see during a recession as buying slows down and people don't buy as many commodities or buy products that use those commodities, those prices can take big dips. You mentioned gas prices, but for example, in the last year, wheat prices are down 30 percent. Iron and steel prices are off 9 percent. Lumber prices are down 5 percent. Cement is off 2 percent. Again, this is all a function of the worldwide economic recession. Demand is down; supply the same, so in economic terms, the price has to go down. We've seen this in all recessions. It is in some sense a necessary fact that this has to occur for people to become more optimistic and increase their buying and get us out of a recession. So in some sense, you can look at the drop in commodity prices as a forerunner of an eventual revival of the economy."

Posted by Dave at January 9, 2009 08:00 AM